"subject To" Real Estate Investing: A Win-win-win Deal
by Mark Walters on 2007-09-22
As a real estate investor, you should be familiar with alternative, non-traditional financing methods. Every property owner you meet will be in a different situation and have different motives for selling. When you are able to choose from a variety of financing options, then you can tailor the purchase to each situation, increasing your profits and reducing your risk.
"Subject to" is an excellent option when the seller is highly motivated to move their home as quickly as possible. Subject to means that you purchase a property subject to the existing financing. Ownership of the property is transferred to you, but you don't assume the existing loan. Rather, you just take over the payment book and start making the loan payments yourself each month. Once you have control of the property, you can rehab it, flip the house for a profit, or find a tenant.
Why would a seller even consider this arrangement? There are many reasons. The seller is almost always in a situation where they want to sell the house quickly. They have a problem that needs a fast solution. It may be due to a relocation for work, an impending foreclosure, or they may have even inherited another house.
The most common concern sellers have is whether you'll make the payments as promised. You should have no trouble gaining the seller's trust if you're confident about what you're doing and fully accept that you are responsible for keeping up the payments.
Subject-to real estate investing is not without risk. You should be aware that many home mortgages include a "due on sale" (DOS) clause. This means the lender has the right to call in the loan (that is, demand payment of the balance in full) upon transfer of the title.
Most experts think that in today's economic climate, lenders are unlikely to exercise the due on sale option, especially if the loan payments are made regularly, on time, and without interruption. However, this is a contingency you need to consider. If the lender exercises the DOS clause, you'll need to arrange for your own financing or find a joint venture partner who has the cash to cover the balance.
Subject-to investment deals can be completed quickly because there's no need for qualifying with a lender. And with no closing costs, a subject to agreement is less expensive than a traditional sale. Once you understand the mechanics of subject to, you'll find it to be one of the easiest and least complicated financing arrangements you can put together.
Although some may question the ethics or legality of the arrangement, subject-to is a legal and ethical way to purchase property. In most cases, you'll be helping sellers out of a tight spot, providing rescue in their time of need. Everyone gets what they want in subject to--the seller gets rid of the property, the lender keeps receiving their payments with interest, and you stand a good chance of making a tidy profit.
"Subject to" is an excellent option when the seller is highly motivated to move their home as quickly as possible. Subject to means that you purchase a property subject to the existing financing. Ownership of the property is transferred to you, but you don't assume the existing loan. Rather, you just take over the payment book and start making the loan payments yourself each month. Once you have control of the property, you can rehab it, flip the house for a profit, or find a tenant.
Why would a seller even consider this arrangement? There are many reasons. The seller is almost always in a situation where they want to sell the house quickly. They have a problem that needs a fast solution. It may be due to a relocation for work, an impending foreclosure, or they may have even inherited another house.
The most common concern sellers have is whether you'll make the payments as promised. You should have no trouble gaining the seller's trust if you're confident about what you're doing and fully accept that you are responsible for keeping up the payments.
Subject-to real estate investing is not without risk. You should be aware that many home mortgages include a "due on sale" (DOS) clause. This means the lender has the right to call in the loan (that is, demand payment of the balance in full) upon transfer of the title.
Most experts think that in today's economic climate, lenders are unlikely to exercise the due on sale option, especially if the loan payments are made regularly, on time, and without interruption. However, this is a contingency you need to consider. If the lender exercises the DOS clause, you'll need to arrange for your own financing or find a joint venture partner who has the cash to cover the balance.
Subject-to investment deals can be completed quickly because there's no need for qualifying with a lender. And with no closing costs, a subject to agreement is less expensive than a traditional sale. Once you understand the mechanics of subject to, you'll find it to be one of the easiest and least complicated financing arrangements you can put together.
Although some may question the ethics or legality of the arrangement, subject-to is a legal and ethical way to purchase property. In most cases, you'll be helping sellers out of a tight spot, providing rescue in their time of need. Everyone gets what they want in subject to--the seller gets rid of the property, the lender keeps receiving their payments with interest, and you stand a good chance of making a tidy profit.
About The Author: Author - Mark Walters is a 3rd generation real estate investor and author. He offers a FREE Online Real Estate Investing Video & Audio Series at www.CashFlowInstitute.com